US Recession 2025? What 1% Prediction Market Odds Get Right—and Wrong—About the Cycle

On Polymarket right now, you can buy “US recession in 2025” for roughly a penny on the dollar. In prediction‑market terms, that’s a 1% implied probability that the economy slips into an NBER‑defined downturn next year—a tail so thin traders are effectively saying, “It’s not happening.”

That market is a simple binary contract: it pays $1 if the US experiences a recession at any point in calendar 2025, and $0 otherwise. Yet behind that seemingly straightforward bet sits a striking disconnect with both history and mainstream macro analysis.

Historically, when you see a setup like the one we’ve just lived through—deep yield‑curve inversion, followed by re‑steepening as the Fed pivots—recession almost always follows. Since the late 1960s, similar episodes have carried roughly 70–80% odds of a recession within 24 months. Fed‑style probit models based on the term spread typically put 12‑month odds in the 20–40% range during such configurations.

Today’s institutional models aren’t nearly as sanguine as the 1% market price, either. Cleveland Fed–type specifications using the Treasury curve and other inputs put current US recession probabilities in the low‑20s to high‑20s percent range. The Conference Board sees 2025 real GDP around 1.8%, slowing further in 2026, and its LEI continues to signal “fragile, uneven growth.” Payroll gains have decelerated, unemployment has risen about 0.5 percentage points over 2025, and the LEI has softened. At the same time, powerful supports remain: robust AI/data‑center capex, Fed rate cuts, and a roaring equity market driving wealth effects.

So which signal do you trust? Are prediction markets correctly reading a structurally more resilient US economy and AI‑driven investment boom—assigning near‑zero odds to a classic hard landing? Or are they underpricing tail risk in a late‑cycle environment that still looks, by historical standards, recession‑prone?

For macro investors and prediction‑market traders, that gap isn’t academic. If the true odds are closer to 10–30% than 1%, portfolio construction, hedging, and even small retail trades on platforms like Polymarket and Kalshi may be misaligned with reality.

The rest of this piece will unpack that puzzle in four steps: (1) what prediction markets are actually pricing across key contracts, (2) what traditional indicators and institutional forecasters say, (3) how prediction markets have performed in past macro turning points, and (4) what that implies for 2025–26 scenarios and trade ideas across rates, equities, and credit.

Before we decide whether prediction markets or macro models have the better read on the cycle, we need to pin down exactly what that “1%” is saying.

On Polymarket, the flagship contract is “US recession in 2025?”. It’s a simple binary:

• It pays $1 if the NBER later dates a US recession that begins in calendar year 2025.
• It pays $0 otherwise. That includes recessions that start in late 2024 or any time in 2026 or beyond.

That detail matters. A classic late‑cycle downturn that begins in, say, Q1 2026 would not pay this contract, even if it feels like “the 2025 recession” in market narratives.

As of mid‑December 2025, the YES side trades around $0.01–0.012, implying roughly 1–1.2% odds that the NBER will eventually judge a recession to have started in 2025. Cumulative volume is in the low seven figures, with mid‑six‑figure open interest, mostly in NO. That’s not Treasury‑futures‑scale liquidity, but it’s large enough that the price reflects more than a handful of hobbyists.

The path to 1% has been a grind lower rather than a single-step collapse:

• Early 2025: As unemployment began to tick up and the Conference Board’s LEI stayed weak, YES traded in the mid‑single digits (around 5–7%).
• Mid‑2025: Softer inflation prints, a roaring equity market, and AI/data‑center capex headlines pushed odds down toward 2–3% as “soft landing” became consensus.
• Q4 2025: The government shutdown, tariff headlines, and softer hiring briefly nudged the contract higher, but it never broke back above the 3–4% area and has since drifted to ~1% as the calendar window has nearly closed.

Two clarifications follow from this structure:

1. Horizon mismatch. The contract now mostly prices:

   • the chance that incoming data lead the NBER to backdate a 2025 start, plus
   • the very slim probability that a recession clearly begins in the final weeks of the year.

   It tells you almost nothing about “recession sometime in the next 12–24 months,” which is what yield‑curve models and institutional forecasts are targeting.

2. Why 1% doesn’t just mean “no recession at all.” Traders could simultaneously believe:

   • 2025‑start recession risk ≈ 1%, and
   • 2026‑start recession risk is much higher (say 15–25%).

Low pricing here may reflect genuine optimism about an extended expansion—but it may just as easily reflect belief in a delayed downturn and market microstructure (crypto‑native trader base, limited institutional hedging demand, and tight, NBER‑based resolution criteria). We’ll come back to those structural issues later; for now, the key point is that the headline 1% is a very narrow, calendar‑year‑onset bet, not a verdict on the entire cycle.

3. Late‑2025 macro backdrop: slowing jobs, solid GDP, sticky inflation

By late 2025, the macro data describe an economy that is slowing, not stalling. If Polymarket’s 1% price is right, this constellation of signals has to be read as safely short of anything the NBER would call a recession.

Growth: modest, AI‑boosted, but losing altitude
Institutional baselines cluster around ~1.8% real GDP growth for 2025, with both the Conference Board and the New York Fed’s DSGE model in that neighborhood. That’s meaningfully slower than the post‑pandemic boom, but still positive.

Under the hood, capex has done a lot of the heavy lifting. AI and data‑center investment, nondefense capital goods orders, and a rebound in certain durable‑goods categories have offset drags from higher tariffs and softer middle‑income consumption. A roaring equity market has amplified wealth effects, helping keep top‑quartile household spending resilient even as the aggregate growth rate downshifts.

Labor market: from red‑hot to merely warm
The most obvious late‑cycle deterioration is in jobs. Through Q3, payroll gains had already decelerated; in Q4 2025, conditions weakened further as the federal government shed tens of thousands of workers and private‑sector hiring slowed to a near standstill. The unemployment rate is expected to finish the year roughly 0.5 percentage points above its 2024 lows—enough to flash caution in most recession‑probability models, but not yet at the levels typically seen at NBER peaks.

This is the classic “rolling slowdown” profile: fewer openings, slower hiring, and a modest uptick in joblessness rather than an outright collapse in employment.

Demand, income, and sticky inflation
On the demand side, the expansion is increasingly bifurcated. Affluent households, buoyed by equity and housing gains, have kept discretionary spending strong. But lower‑ and middle‑income consumers face a more uncomfortable mix: slower job growth, less bargaining power on wages, and inflation still running above the Fed’s 2% target (most forecasts put 2025 CPI somewhere around 3%). Real income gains at the bottom of the distribution are thin at best.

This combination—healthy high‑end demand plus pressure on the middle—helps explain why headline GDP can look fine while recession risks feel elevated on the ground.

Leading indicators: fragile, uneven growth into 2026
The Conference Board’s Leading Economic Index continues to point to slowing activity into early 2026. Stock prices, credit conditions, and capex orders contribute positively, but weakness in new orders, consumer expectations, and manufacturing keeps the composite in “fragile, uneven” territory. Credit spreads and equity markets are not yet behaving like a pre‑recession panic, but the forward‑looking data do not scream “reacceleration.”

Policy and shocks: cuts vs. tariffs, with a data fog
Layered on top of the fundamentals is an unusually noisy policy environment. A late‑year government shutdown has delayed key data releases, leaving recession‑watchers partially flying blind on Q4 payrolls and GDP. New tariff measures have raised uncertainty about 2026 trade flows and input costs.

The Fed, for its part, has already begun cutting rates or very clearly signalled cuts into 2026—markets and private forecasters expect the funds rate to drift toward the 2.75–3.0% area by late 2026, from restrictive levels in 2024. Those cuts are explicitly aimed at leaning against the slowdown signalled in the LEI and labor data, but they also validate the idea that the expansion is late‑cycle, not mid‑cycle.

Put together, late‑2025 looks like a classic mature expansion: sub‑2% growth, a softening labor market, above‑target inflation, and rising policy noise. That’s not obviously a 2025‑proof backdrop. For Polymarket’s 1% pricing to be right, traders either have to believe in a genuinely more resilient, AI‑reinforced cycle—or, more plausibly, that any eventual downturn will land just outside the contract’s 2025 window. The next sections will dig into that tension between late‑cycle fundamentals and ultralow market odds.

With the late‑2025 backdrop in mind, the natural question is what the classic recession dashboard is actually saying. Strip away AI narratives and prediction‑market microstructure, and the traditional indicators are not consistent with a 1% tail.

Yield curve: inversion, then re‑steepening

The Treasury curve has already done the classic late‑cycle dance:

• Deep inversion in 2022–24 on both 2s/10s and 3m/10y, among the sharpest since the early 1980s.
• Re‑steepening through 2025 as markets priced in, and then received, Fed cuts.

Comerica’s December 2025 outlook has the 10‑year yield averaging 4.00–4.25% in 2026, with the fed funds rate drifting down to 2.75–3.00%. That implies a modestly positive curve ahead, but only after a long stretch of inversion with clearly restrictive real short rates.

Historically, that pattern is ominous. Since the late 1960s:

• Every US recession has been preceded by a sustained yield‑curve inversion, typically defined as several months with 10y–3m or 10y–2y below zero.
• The lag from first meaningful inversion to recession onset runs about 8–19 months.
• Crucially, the re‑steepening itself often happens before the downturn, as the Fed cuts into emerging weakness (late 1980s, 2000, 2007).

On that scorecard, today looks like a textbook “late in the game, not out of the woods” setup. Curve‑based probit models that would normally imply 20–40% 12‑month odds and 70–80% 24‑month odds sit uncomfortably beside a 1% 2025 contract on Polymarket.

Labor market: early‑stage softening

Labor data are less binary but still lean late‑cycle, not mid‑cycle:

• Unemployment has risen about 0.5 percentage points over 2025, from very low levels.
• Job openings have fallen, hiring has slowed, and Q4 layoffs have been concentrated in government, with private‑sector payrolls barely growing.

Historically, the jobless rate usually turns up 0.5–1.0 percentage points before NBER recession start dates. Claudia Sahm’s rule (a 0.5pp rise in the 3‑month average vs its 12‑month low) has flagged every post‑1960 recession with no false positives. Today’s move is in that neighborhood, but without the broad‑based, private‑sector job losses that typically mark an imminent downturn.

Signal: late‑cycle risk is elevated, but the labor picture is still compatible with an extended soft landing if easing and fiscal supports bite in time.

LEI: pointing to a slow‑growth edge

The Conference Board’s Leading Economic Index remains negative on balance and continues to signal “fragile, uneven growth” into early 2026. Their baseline:

• Real GDP slows from about 1.8% in 2025 to 1.5% in 2026.
• Tariffs and softer consumption are the main drags; equity prices, capex orders, and the Leading Credit Index are cushions.

In past cycles, downshifts of that magnitude have sometimes produced growth recessions that stop short of an NBER event (mid‑1990s), and other times have tipped into full recessions (2000, 2007). The LEI is not screaming “hard landing,” but it is absolutely not validating a near‑zero probability of recession over a 1–2 year horizon.

Credit conditions: the dog that hasn’t barked (yet)

One clear difference from 2008‑style episodes is credit:

• The Leading Credit Index component of the LEI is still supportive.
• Corporate credit spreads are wider than at the 2021–22 boom but not at levels associated with acute stress or a funding crunch.

That’s a material distinction. Before 2008, widening spreads, tightening lending standards, and a broken securitization machine did as much damage as the real‑economy slowdown. Today’s configuration looks more like 2000–01 or 1995 than 2008: policy‑driven restraint and softer demand, not a systemic credit shock—at least not yet.

Consumption & housing: strong, but losing momentum

Household demand has been the main argument against imminent recession:

• Consumer spending is still solid but clearly leveling off, particularly for middle‑income households facing slower job gains and above‑target inflation.
• Durable‑goods purchases have been underpinned by the July 4 tax cuts, which front‑loaded some demand into late 2025.
• Existing home sales are expected to rebound as mortgage rates drift lower with Fed cuts; housing looks more like a slow thaw than a collapse.

Historically, recessions tend to be preceded by a rollover in interest‑sensitive sectors first—autos, housing, big‑ticket durables. Right now, those sectors look soft but not broken, again tilting the odds toward either a delayed downturn or a mild, growth‑rate recession rather than an immediate, 2008‑style break.

Putting the classic dashboard together

Taken as a whole:

• Bearish signals: a textbook inversion‑and‑re‑steepening of the curve, early‑stage labor softening, and a weak LEI all argue for elevated recession risk in the next 12–24 months.
• Offsetting supports: benign credit, still‑positive consumption, and a housing recovery argue against a near‑term, severe contraction.

That mix is exactly why institutional models cluster in the low‑ to high‑20s percent range for recession risk, not 1%. Even if 2025 itself escapes an NBER event—and the Polymarket contract may still be right on that narrow question—the classic indicators are not offering the all‑clear for 2026. For macro traders, that gap between a late‑cycle dashboard and ultra‑low market odds is the opportunity this cycle presents.

With the dashboard flashing late‑cycle, the next step is to ask: in past cycles that looked like this—deep inversion, then re‑steepening with only gentle labor softening—what actually happened?

The raw historical record: inversion rarely cries wolf

Across Chicago, St. Louis, Cleveland and New York Fed work, the basic fact pattern is consistent:

• Since the late 1960s, every NBER‑dated US recession has been preceded by a meaningful yield‑curve inversion (typically 10y–3m or 10y–2y).
• There have been very few major inversions that weren’t followed by recession within roughly two years—1965, 1998 and, depending how you classify it, the 2019 episode are the main quasi‑exceptions.

If you restrict attention to deep, sustained inversions (months, not days, below zero), you get roughly 7–8 such episodes in the post‑’68 sample. All but one or two were followed by recession within about 24 months. That’s where the ~70–80% conditional base rate comes from.

New York and Cleveland Fed‑style probit models translate those spreads into explicit odds. When the 10y–3m or 10y–2y is deeply negative, their standard specifications typically spit out something like 30–60% probability of recession over the next 12 months, with the cumulative 24‑month odds materially higher because the typical lag is 8–19 months.

Even if you don’t like any one model, the message from the family of models is clear: a configuration like we’ve just lived through has never corresponded to a 1% tail in the historical data.

Conditioning on today’s exact setup

The configuration we care about isn’t just “inversion,” it’s:

• Deep inversion, then re‑steepening as the Fed begins or signals cuts;
• Unemployment low but edging up (≈0.5pp off the lows);
• Growth still positive but slowing.

That combination is not exotic—it’s the standard late‑cycle pattern in:

• 1989–90 (Volcker‑to‑Greenspan handoff, curve inverted then re‑steepened as cuts began, unemployment ticked up before the 1990–91 recession);
• 2000–01 (tech boom ends, inversion in 1998–2000, re‑steepening on Fed easing, jobless rate off the floor before recession);
• 2006–07 (housing peak, deep inversion in 2006, re‑steepening as the Fed pivoted, unemployment bottoming in early 2007 before the Great Recession).

In other words, “low but rising unemployment + moderate growth after a deep inversion” is exactly what late‑cycle usually looks like before a downturn, not an environment in which the curve has historically failed.

Conditioning on this richer setup doesn’t lower the base rate; if anything, it pushes you toward the upper end of the 70–80% “recession within ~2 years” range, because you’re filtering out many of the soft‑landing mid‑cycle scares.

Nuances: term premia, QE, and the “false alarms”

The main caveat is structural: term‑premium compression and global QE have flattened curves since the 2000s, increasing the chance of inversions not driven by truly tight policy.

In the 1998 LTCM episode and the 2019 inversion, the Fed was not meaningfully above neutral and long rates were being pulled down by global demand for safe assets and QE. Boston Fed work shows that in such cases, raw term‑spread models overstated risk—for 2019, taking the inversion at face value implied roughly 55% 12‑month odds, while conditioning on the easy policy stance cut that to around 30%.

Translating that lesson to today, you can reasonably shade the classic base rates down if you think:

• much of the recent inversion was term‑premium driven, and
• policy, while restrictive, never got as tight as in early‑1980s or mid‑2000s cycles.

Even then, you are talking about moving from, say, 40–60% to perhaps 20–30% 12‑month odds, and from 70–80% to something like 40–60% over 24 months—not from 40–60% to 1%.

However you slice the history, it is difficult to reconcile a 1% price with any reasonable reading of conditional base rates. Either you must believe that the yield curve and classic late‑cycle dynamics have largely lost their information content, or you must accept that prediction markets are underpricing cyclical risk—especially in horizons beyond the narrow 2025 window of the flagship contract. That wedge between history and pricing is what creates potential opportunity for macro investors, which we’ll turn to in the next sections.

If the historical base rates say “non‑trivial risk,” institutional forecasters say much the same—just in more diplomatic language. None of the major outlooks treat a 2025–26 downturn as a 1% tail. Instead, they cluster around a soft‑landing baseline for 2025 with elevated odds of trouble by 2026.

Start with the Conference Board. Their December outlook pegs real GDP at 1.8% in 2025 and 1.5% in 2026, explicitly describing the path as “fragile, uneven growth”. The LEI remains weak, pointing to slowing momentum into late 2026. They do not call a 2025 recession, but the message is clearly late‑cycle: growth is positive, yet the margin of safety against a downturn is thin.

The Cleveland Fed’s yield‑curve model is blunter because it puts a number on the risk. Using the 10y–3m Treasury spread, their standard probit specification shows roughly mid‑20s percent odds of recession by October 2026 (about 26.5% in the latest release). That’s a classic, curve‑driven signal: materially elevated 12–24 month risk—an order of magnitude above Polymarket’s 1% price on a 2025 start.

Private‑sector baselines are similarly cautious on the medium term. Deloitte’s US outlook assumes no recession in 2025, but the baseline scenario has a downturn starting in Q4 2026, with unemployment rising to roughly 4.5% and real growth sluggish until 2028. That is not a 1% tail; it’s the central path.

On the credit‑side, America’s Credit Unions recently cut their estimated recession odds by 2026 from 60% to 40%, citing support from tax cuts and equity‑market strength—but even after that downgrade, they still put the risk at forty times the prediction market’s 1% price for a 2025‑start event.

Finally, the UCLA Anderson Forecast has placed the US on “Recession Watch” for 2025–26, highlighting policy risks from new tariffs, IRS budget cuts, and the potential for a stagflationary mix of slower growth and sticky inflation. They stop short of an outright call but frame a downturn as a plausible, policy‑driven outcome—not an extreme tail.

Put together, these views share a common structure: 2025 looks like a soft (or soft‑ish) landing, 2026 does not look safe. Where they diverge from Polymarket isn’t the basic story—no one is shouting “imminent collapse”—but the confidence level. Institutions are talking about 20–40% medium‑term odds and even baseline recessions; the market is pricing something closer to “don’t worry about it at all” for any downturn that begins in 2025.

For macro traders, that gap is the crux of the opportunity: if the institutional camp is even roughly right about the cycle’s fragility, a 1% contract on a late‑cycle economy looks less like a fair price and more like a mispriced hedge—especially when you think in 2025–26 horizons rather than a narrow calendar‑year trigger.

If institutional models say 20–30% and Polymarket says 1%, how much deference does that market price actually deserve? The answer depends on how prediction markets have stacked up against traditional forecasters on macro and policy risks.

The broad record: strong incentives, good calibration

Across dozens of settings, prediction markets have built a solid reputation. In a landmark review, Wolfers & Zitzewitz (2004) find that market prices are usually well‑calibrated and often more accurate than polls and many expert forecasts for discrete events like elections and policy votes. Snowberg, Wolfers & Zitzewitz (2013) extend this to economic applications, concluding that markets tend to exhibit lower forecast errors than professional forecasters and surveys when they exist side‑by‑side.

The reasons are intuitive: traders have skin in the game; prices update continuously as news arrives; and diverse information and models get aggregated into a single, tradable probability.

Macro‑specific evidence: promising, but narrow

For truly macro outcomes, the evidence base is smaller but directionally similar:

• Data‑release markets (on CPI, nonfarm payrolls, GDP prints) and policy‑decision markets (Fed/ECB rate moves) generally match or beat survey economists on short‑horizon metrics like mean absolute error. When central banks compare market‑implied odds for a meeting against Bloomberg or Blue Chip surveys, the markets are often at least as sharp and typically respond faster to speeches and incoming data.
• Johansson (2024) looks at Kalshi markets on Treasury yields and oil prices and formally compares them to ARIMA models and LSTM neural nets. His main result: market‑based forecasts are competitive, and frequently superior, especially around the volatile 2022–23 inflation and hiking cycle, when standard models struggled with regime shifts.

These studies support the idea that when there is an active, liquid macro contract, its price is usually a useful forecast—not noise.

Where the evidence is thin: recessions and long cycles

The problem for a contract like “US recession in 2025?” is that we don’t have a long, clean history:

• Recession markets are new and episodic; there is no panel covering 2001, 2008, 2020 and today with consistent design.
• Liquidity is often sparse, especially far from the event date, and resolution criteria (e.g., exact NBER dating) can be ambiguous. That makes it hard to say, statistically, that recession markets reliably outperform professional macro forecasters over a full business‑cycle sample.

So while the logic that makes election markets work should carry over, the hard evidence for recession contracts specifically is still limited.

Asset markets as de‑facto macro prediction markets

It’s also useful to remember that we already have large, implicit prediction markets for macro outcomes:

• Fed funds and SOFR futures, options, and swaps encode the distribution of future policy rates.
• Inflation swaps, breakevens, and commodity curves encode inflation and growth views.
• Credit spreads and equity indices embed default and earnings‑cycle probabilities.

In the 2022–23 inflation shock, these instruments generally pulled forward the timing and size of Fed hikes more quickly than economist surveys—but both camps underpriced the persistence and magnitude of inflation. That episode is a reminder that markets and models can share systematic blind spots, especially around structural regime changes.

What that means for the 1%

Netting this out:

• Where prediction markets are liquid and near‑dated (next CPI, next FOMC), history says you should give them substantial weight—often more than any single forecaster.
• For rare, long‑horizon macro events like recessions, the track record is too short to treat a single price—like 1% for a 2025 start—as an oracle.

For macro investors, that argues for treating the 1% as a valuable but fallible input: a revealed‑preference view from a specific trader base that must be blended with historical base rates and institutional models, not used to override them outright.

Prediction markets aren’t at 1% because a wisdom‑of‑crowds machine has calmly weighed every macro risk and declared them negligible. They’re at 1% because of how this specific contract is designed, who trades it, and what incentives they face.

1. The calendar trap: contract design and horizon

As we noted earlier, the Polymarket contract only pays if the NBER dates a recession start in 2025. By mid‑December, that means:

• Any downturn that starts in 2026—the timing many institutional forecasters worry about—doesn’t count.
• A late‑2025 slowdown must be severe and broad enough for the NBER, months from now, to back‑date a peak to this year.

For traders who think the classic post‑inversion recession is coming but more likely in 2026, the rational trade is to sell 2025 YES and wait. The 1% price is as much a comment on the calendar window as on the business cycle.

2. “Too late for 2025” thinking

Even late‑cycle bears can look at the current setup—positive but slowing GDP, a 0.5pp rise in unemployment, weak LEI—and decide there’s not enough time left in 2025 for conditions to deteriorate into an NBER‑class contraction. That logic compresses the conditional probability of a 2025‑dated start even if you still assign, say, 20–30% odds of a recession by late 2026.

3. Trader base: crypto‑native, growth‑heavy

Platforms like Polymarket skew toward:

• Crypto‑native traders whose wealth is tied to risk assets.
• Growth and AI enthusiasts who are long equities and tech narratives.

That composition creates a structural bullish macro bias. When your P&L and worldview are levered to a continued boom in AI capex, it’s easy to interpret mixed data as a soft landing rather than the prelude to a downturn.

4. Liquidity, capacity, and arbitrage frictions

Open interest in the 2025 recession market is mid‑six figures; effective spreads are wide. To move the price from 1% to 3% might take tens of thousands of dollars, not millions. For a macro fund, that’s too small and too unhedgeable to bother with:

• The contract is a binary tied to a discretionary NBER call.
• It doesn’t cleanly hedge any large balance‑sheet risk the way S&P puts or swaptions do.

Result: if the “right” price is 5–10%, there may simply be no natural capital willing to spend time and legal risk pushing it up.

5. Risk‑neutral vs. real‑world probabilities

Prediction‑market prices are risk‑neutral—they embed traders’ risk preferences. If the representative trader dislikes recession states (because their other holdings get hit hard), they’ll demand extra expected return to hold a YES position that only pays in those states. That pushes the YES price below their true subjective probability of recession.

In other words, the market might “believe” 5% but price 1–2% because recession is the pain trade for the marginal participant.

6. Biased information sets and slow updating

Finally, traders are humans with limited attention:

• They overweight visible resilience: stock indices at highs, AI/data‑center headlines, housing thawing.
• They underweight slow‑burn risks: cumulative policy lags, a still‑weak LEI, tariff and fiscal cliffs.

You can see this in how odds reacted to news (chart below): clearly negative shocks—weak payrolls, a higher unemployment print, another soft LEI—produced only fleeting upticks in recession pricing, if any.

Taken together, contract design, trader mix, thin liquidity, risk aversion, and biased information sets all work in the same direction: they pull the quoted probability down relative to what base rates and institutional models would suggest. Even if “no 2025 recession” remains the most likely outcome, there are good structural reasons to think 1% is too low—and to treat that price as a floor, not an all‑clear, when you construct macro trades for 2025–26.

A clean way to reconcile base rates, indicators, and market pricing is to lay out explicit scenarios and ask what share of the future each should reasonably occupy. The point isn’t to produce false precision, but to show how hard it is to get to 1% recession odds without assuming this cycle is fundamentally different from history.

Even these conservative weights imply:

• Total recession odds by end‑2026: roughly 20–30% (Scenario C), in line with Cleveland Fed–style models and private forecasts.
• Odds NBER dates a recession start in 2025: plausibly 5–15%, combining the tail of B (a very mild, back‑dated episode) and C (a more classic downturn).

That’s still a far cry from 1%.

Why single‑digit 2025 odds are plausible—but 1% isn’t

The timing nuance matters. With the year almost over and GDP still positive, you don’t need to believe in a 20–30% chance of a 2025‑start recession to respect the curve and the LEI.

You can hold all of the following at once:

• 2025 soft landing is the modal outcome (A or B together at, say, 60–80%).
• Recession sometime before end‑2026 is a live risk (C at 20–30%).
• Because NBER often back‑dates peaks and troughs, the chance they eventually stamp the start date in late‑2025 is low but not microscopic—call it mid‑single digits to low‑teens.

On those assumptions, 2025 recession odds might reasonably clear 5%, maybe even 10%—still well below what classic probit models would say, but an order of magnitude above the prediction‑market price.

The case for genuine resilience

To argue the true 2025 odds are near 1%, you have to lean heavily on structural strengths:

• AI/productivity boom: Surging data‑center and automation capex props up aggregate demand and supports real‑time efficiency gains.
• Healthy balance sheets: Households locked in low‑rate mortgages; corporates termed out debt, so higher policy rates transmit slowly.
• No 2008‑style credit bubble: Banks and shadow lenders look adequately capitalized; the LEI’s Leading Credit Index is still supportive.
• Proactive Fed cuts: Easing from restrictive levels should cushion demand before labor‑market damage compounds.

If all of that buys you a historically rare, clean soft landing (Scenario A), the unconditional odds of a 2025‑dated recession can be pushed into the low single digits.

The case for underpriced risk

But to get all the way down to 1%, you must all but dismiss:

• Lagged policy effects from the sharpest hiking cycle in four decades.
• Persistent LEI weakness and a maturing labor‑market softening.
• Global and policy shocks—tariffs, geopolitics, fiscal uncertainty—that historically nudge late‑cycle economies over the edge.
• The empirical difficulty of engineering a soft landing after a deep inversion and re‑steepening.

That combination makes the prediction‑market price look less like a cool reading of resilience and more like overconfidence plus contract design. Our judgment, fusing base rates, indicators, and institutional forecasts:

• The most likely outcome is still “no official recession starting in 2025.”
• But the true probability of a 2025‑dated start is almost certainly several times higher than 1%, and the odds of a downturn by end‑2026 are much closer to 20–30%.

For macro investors and prediction‑market traders, that wedge—between a plausible 5–15% and a traded 1%—is precisely the kind of mispricing that can justify small, convex recession hedges and asymmetric positioning, which we’ll turn into concrete trade ideas in the next sections.

10. Trading and hedging implications for macro investors and market participants

If you believe, as the base rates and institutional models suggest, that the true probability of a 2025‑dated recession is several times higher than 1%, the immediate question is how to use—rather than worship or ignore—that mispricing.

10.1 EV math: what does 1% actually buy you?

Suppose the YES side of “US recession starts in 2025” trades at $0.01:

• If the true probability of a 2025 start is 5%, the expected value (EV) of YES is:
  • EV = 0.05 × $1 – 0.95 × $0.01 ≈ $0.04 (4¢)
  • You’re paying 1¢ for something “worth” ~4¢ → 4:1 EV advantage.
• If the fair probability is 10%, EV ≈ 0.10 – 0.90 × 0.01 = $0.091 → 9:1 EV.

That looks huge on paper, but the payoff is binary: you either lose 100% of the stake or make 99¢. Resolution can be slow (NBER dating), order books are thin, and your capital or attention could be earning returns elsewhere. Treat this as lottery‑ticket convexity, not a core macro allocation.

10.2 How to size: tail‑risk chips, not hero trades

Even if you think 5–10% is the right probability, you’re still dealing with:

• Model uncertainty (history may rhyme differently this cycle).
• Contract risk (NBER dating nuances, shutdown‑delayed data).
• Platform and regulatory risk.

Pragmatically, that argues for small sizing:

• For a diversified macro book: think 0.25–1% of NAV in 2025‑recession YES as cheap convexity.
• For a retail trader: an amount you are comfortable writing down to zero while thinking of it as an insurance premium, not a speculative centerpiece.

You can also stage entries—buy some YES now, and be willing to add if odds drift below 1% into year‑end or on complacent rallies in risk assets.

10.3 Hedging the cycle via liquid macro markets

Whether or not you use the prediction market directly, the key portfolio question is the same: is your book implicitly priced for 1% recession odds or for something closer to 20–30% by end‑2026?

Ways to express “recession risk > market pricing” outside the binary contract:

• Duration (Treasuries): go long intermediate or long‑dated Treasuries; classic hedge if a downturn brings more cuts and a flight to safety.
• Equity downside hedges: S&P 500 or Nasdaq puts/put spreads, or structured products that cheapen skew; benefits if earnings roll over from late‑cycle to outright contraction.
• Credit protection: buy CDX IG/HY protection or short lower‑quality credit where spreads still look like a Goldilocks soft landing.
• Rates vol: payer swaptions on front‑end rates if you think the Fed will be forced to cut deeper or earlier than current curves, or receiver swaptions to monetize a rates rally in a landing.

The art is in aligning horizons. A 2025‑start recession contract is very near‑dated; Treasuries and credit trades can express 2026 risk that the flagship prediction market doesn’t capture.

10.4 Markets as signals, not oracles: building a simple dashboard

Rather than “trade every 1% vs 25% gap,” use prediction markets as one line in a triangulation dashboard:

• Prediction‑market odds for recession/start date.
• Yield‑curve‑based probit model (NY or Cleveland Fed style).
• LEI trend and labor‑market triggers (e.g., Sahm‑rule threshold).
• Institutional or sell‑side probability ranges.

When the prediction market diverges sharply (1% vs 20–30%), treat that as a research prompt:

• If you conclude traders see something real (e.g., AI‑led capex genuinely transforming cyclicality), you lean into risk.
• If you conclude the divergence is structural (calendar trap, trader base, liquidity), you tilt into recession‑sensitive hedges and/or small YES positions.

10.5 Relative value and structure: beyond a single YES ticket

Mispricings often show up in the term structure of macro risk:

• Compare 2025‑start vs 2026‑start recession contracts.
• Look at unemployment‑threshold markets (e.g., jobless rate >X%) and policy‑rate cuts markets.

If 2025 recession sits at 1%, but 2026 recession, unemployment ≥5%, and ≥200 bps of cuts are all priced as if stress is much more likely, you can:

• Buy cheap tails, sell expensive ones, creating a relative‑value strip instead of a naked bet.
• Use the prediction markets primarily to fine‑tune where in the curve you want to be long duration or long downside equity optionality.

10.6 Regulatory and operational frictions

Finally, there are risks that have nothing to do with the business cycle:

• KYC and jurisdiction: US persons face strict limits or outright bans on some platforms; rules can change mid‑life of the contract.
• Platform risk: smart‑contract bugs, exchange solvency, or legal action could delay or impair payouts.
• Resolution risk: the contract hinges on a particular reading of NBER business‑cycle dating. Borderline “growth recessions” or data revisions can lead to contentious calls and slow resolution.

Those frictions dilute the headline EV advantage of a 1¢ ticket. For institutional macro investors, that often tips the decision towards using regulated, high‑capacity instruments (rates, credit, listed options) for size, while treating prediction markets as small, high‑convexity satellites and cross‑checks on consensus rather than the main event.

11. What to watch through 2025: indicators that will move recession odds

The cycle from here won’t be decided by one headline; it will be the accumulation of a few key signals. Think in terms of a macro dashboard you refresh monthly, alongside live prediction‑market prices.

Labor market: the trigger zone

• Payrolls momentum: Focus on the 3‑month average of nonfarm payrolls. A drift toward 0–50k or outright negatives is your cue to mark 2026 recession odds higher and expect recession YES markets (for 2025 or 2026 starts) to move out of the 1–3% range into mid‑single digits or higher.
• Unemployment rate: A cumulative rise of 0.5–1.0pp from the cycle low (Sahm‑rule territory) has historically aligned with imminent recessions. If that threshold is breached, a 1% price on a 2025 start (and very low odds on 2026) deserves a material upward revision.
• Continuing claims & state diffusion: Sustained increases in continuing claims and a rising count of states in recession per Moody’s mean weakness is broadening. When half the country looks soft on employment, soft‑landing odds fall fast.

Activity: PMIs, production, and housing

Once the shutdown‑related data fog clears, watch:

• ISM manufacturing and services PMIs: A sustained sub‑50 reading in both is classic pre‑recession territory. That should push prediction‑market odds meaningfully higher, not just from 1% to 2%.
• Industrial production & real retail sales: Two or more consecutive monthly declines usually mark a genuine downshift in demand.
• Housing starts and existing home sales: If Fed cuts don’t stabilize housing and volumes roll over again, that’s a sign policy transmission is impaired and downturn risk is rising.

Leading indicators: LEI path and its guts

The Conference Board LEI is already weak; the question is whether it stabilizes or accelerates lower:

• Deterioration led by new orders, consumer expectations, and the Leading Credit Index is a clear late‑cycle red flag.
• A flattening or modest rebound, driven by orders and credit, would justify leaning back toward a soft‑landing base case and fading aggressive recession hedges.

Financial conditions: where stress will show up first

• Credit spreads: If IG and high‑yield spreads blow out toward historical stress zones, and dispersion within HY spikes, markets are starting to price default risk—not just slower growth. That’s when recession YES markets can leap multiple points in days.
• Senior Loan Officer Opinion Survey (SLOOS): A renewed swing toward broad tightening in business and consumer lending is a classic pre‑recession pattern.
• Bank funding and equity volatility: Widening bank funding spreads and a shift in VIX to a higher, stickier regime are your confirmation that financial conditions—not just the data—are turning.

Policy path: Fed, fiscal, tariffs

• Fed dots vs. market pricing: If the Fed pushes back on cuts and the dot plot drifts above the OIS curve, you’re looking at a higher chance of a policy mistake—nudge recession odds up. If the Fed validates or exceeds market‑implied easing in response to soft data, that supports a longer soft landing narrative.
• Fiscal and tariffs: Watch for front‑loaded spending cuts, expiring tax relief, or new tariff rounds into 2026. A synchronized fiscal and trade hit in a late‑cycle economy is the sort of shock that can flip prediction markets from complacent to stressed.

Building and using your dashboard

A simple, practical setup:

• Monthly: Payrolls/unemployment, ISM PMIs, LEI, credit spreads, prediction‑market odds for 2025/2026 recessions.
• Quarterly: SLOOS, GDP, bank earnings commentary on credit quality.
• Event‑driven: FOMC meetings, major fiscal/tariff announcements.

The discipline is to pre‑decide how each surprise moves your priors. If labor, LEI, credit, and policy all break the wrong way at once, your dashboard should tell you to: raise your subjective odds, expect prediction markets to follow, and scale up recession hedges rather than waiting for the NBER to make it official.

Prediction markets have delivered a clear verdict on one very narrow question: an NBER‑dated US recession that begins in 2025 is priced as a rounding error. At roughly 1%, that contract is saying “almost certainly not this year.”

Across the rest of the evidence, that level of certainty doesn’t hold. Deep inversion and re‑steepening of the yield curve, a softening labor market, and a persistently weak LEI have historically corresponded to material 12–24 month recession odds, not a 1% tail. Cleveland‑style term‑spread models land in the mid‑20s percent range for recession by late 2026; private baselines from Deloitte, America’s Credit Unions, and UCLA Anderson all flag elevated risk or outright downturns in that window. The base case may still be a soft landing, but not a guaranteed one.

What this cycle really demonstrates is the power and the limits of prediction markets for macro. They are excellent information‑aggregators where events are frequent, contract design is clean, and liquidity is deep. For rare, definition‑heavy states like NBER recessions, prices are shaped just as much by calendar windows, trader composition, risk aversion, and platform frictions as by the true underlying odds.

For macro investors, the lesson is not to choose sides between markets and models, but to build a portfolio of tools. Combine prediction markets, yield‑curve and LEI models, institutional forecasts, and your own scenario work. Pay closest attention where they agree (late‑cycle, higher‑than‑normal risk over 12–24 months), and interrogate the places they diverge (exact timing, depth, and narrative around AI‑driven resilience).

The next two years will be a live experiment in whether modern prediction markets can consistently beat traditional macro indicators at calling turning points—or whether they need better design to realize that potential. Until we see the outcome, disciplined skepticism is the right stance: respect what a 1% price tells you about prevailing beliefs and incentives, but do not ignore the weight of historical base rates and current indicators when sizing risk, setting hedges, and stress‑testing your portfolio.